What Are Index CFDs and How do I Trade Them?
Meta Description: Index CFDs offer you the chance to trade leading indices from around the world. Learn more about these CFD instruments and how to get started trading them.
Index Contracts for Difference, also known as index CFDs, are instruments through which you can speculate on the performance of an overall stock market, as opposed to individual stocks and shares. For example, if you think the ASX 200 is going to perform well in the future, you can take a CFD position that will result in a profit if it does.
Index CFDs are often seen as being lower risk than trading single stocks, because you are spreading your risk across the entire market rather than an individual company. With this type of trading, most of the risks that could impact individual companies is removed from the equation, which allows for diversified exposure.
Many people also prefer to trade index CFDs rather than individual stocks because it’s a cost-effective way to invest in a group of stocks without having to track the ongoing performance of individual companies.
How do I trade index CFDs?
Indices provide a representative price for a group of shares that share an industry, exchange, location or other common class. Traders can invest in either the indices themselves, or use CFDs to speculate on the volatility and price of index values.
Here’s how to start trading index CFDs:
1. Choose your market
The first step is to choose the market in which you wish to trade i.e. take a CFD position on. Most trades are centred on country indices such as the FTSE100 (UK), Dow Jones Industrial Average (US), CAC40 (France) and DAX (Germany).
2. Take a position
CFDs allow you to speculate on both upward and downward moving market fluctuations, so you’ll need to identify which direction you think the market will be moving in next. If you think the market will improve you should go long. If you believe the market will see a downturn, you should go short.
3. Choose a trading platform
One of the most popular ways to trade CFD instruments is by using a CFD online platform like ForexCT. You should choose a trading platform that fits your style, your goals, and your level of experience. Make sure that your platform gives you access to real-time and historical data so you can make informed trading decisions.
4. Set and monitor your trades
Now it’s time to execute and track your trades. Depending on the state of the market and your goals, you can invest a lump sum upfront or spread it out over a series of smaller, regular sums, which is known as dollar-cost averaging. Dollar-cost averaging – say $200 a month into an index fund – can help overcome some of the concerns about investing a lump sum in a market that may not go in the direction you predicted.
Interested to learn more about CFD instruments? Download our free CFD trading eBook and sign up for a demo trading account to get started.